If a firm declares a 20:1 stock split,and the pre-split price was $500,then we might expect the post-split price to be $25.However,it often turns out that the post-split price will be higher than $25.This higher price could be due to signaling effects investors believe that management split the stock because they think the firm is going to do better in the future.The higher price could also be because investors like lower-priced shares.

Question

Quizplus · Accepted Answer

The statement correctly explains why the post-split price might be higher than expected. The reasons mentioned, signaling effects and investor preference for lower priced shares, can both contribute to a higher post-split price.

If a Firm Declares a 20:1 Stock Split,and the Pre-Split